Baker Hostetler partners and co-chairs of the firm’s Tax Controversy practice, Jeffry J. Erney (Cleveland office) and James N. Mastracchio (Washington, D.C., office), were interviewed regarding the second Offshore Voluntary Disclosure Program (OVDI) recently announced by the IRS in the article, “Bar To Arguing Non-Willfulness Under Offshore Disclosure Programs Creates Concerns,” which appeared in Issue #13 of the Federal Tax Weekly: Practitioners’ Corner on March 31, 2011. The interview was conducted by one of the Managing Editors of CCH, a leading provider of tax, accounting and audit information, software and services for professionals.
Following are highlights of the interview.
CCH: “What was the penalty structure under the first OVDI program?”
Mastracchio: “The fixed penalty under the initial 2009 OVDI program was set at 20 percent of the highest account or asset value between 2003 and 2008. Over time—the first OVDI ran from March 2009 through October 2009—there were a number of people who wanted to participate but a penalty of 20 percent of an account was too high. That single, blanket penalty took the place of a variety of different information return penalties that could apply, including a failure to file by June 30 of each year the so-called FBAR information form.”
CCH: “We understand that you also have had experience dealing with another modification to the 2009 OVDI, FAQ (Frequently Asked Questions) 35?”
Erney: “FAQ 35 said that under no instance will anyone have to pay a penalty that’s greater than what the statute would otherwise impose. What that particular language said to a lot of practitioners was that a client in trouble only because of FBAR might qualify for a penalty significantly lower than 20 percent. The penalty associated with filing the FBAR under the statute is two pronged: a 50 percent penalty if you acted in a willful way in not filing the FBAR and only between $0 and $10,000 if you acted non-willfully.
So, many taxpayers who were contemplating coming in to the program understood the FAQ 35 to say that if you don’t like the 20 percent penalty on your account, and you didn’t act willful then the statute could impose a lower penalty.”
CCH: “What is the current status of FAQ 35 under pending submissions?”
Mastracchio: “We were able to make FAQ 35 submissions requesting a review of the willfulness issue until February 8 of this year, when the 2011 offshore program was issued. One of the major things the IRS did differently in the 2011 program was, if you join the 2011 program, there will be no opportunity to claim that you were not willful. You take that 25 percent penalty under that program, or you don’t come in. The IRS is not going to engage in a discussion of whether you were willful. What’s more, the IRS also has begun to deny FAQ 35 arguments in pending 2009 OVDI cases.”
CCH: “For the taxpayers that filed in the interim period between the first and second programs, does the 2011 program relate back to them?”
Mastracchio: “People who came in after October 2009 but before February 8, 2011, are now starting to receive standardized letters from the IRS notifying them of the 2011 OVDI and that to comply with the new program, they have to have all their records in by August 31, 2011. I interpret these notices to mean that if you don’t have your records in by August 31, then by default, you’re not in and the regular statute would apply to you.”